Is The February Unemployment Report A Sign Of Good Things To Come? [View instapost]

Hi Joseph,

Here are some thoughts that I had to a conversation in my inbox:

I feel that the markets were ripe for a steep correction in February that was once again forestalled by some invisible hand. I don't think it's coincidental that every time the market seems technically weak and ready to break that they explode to the upside. February 25th seemed like a day that would precede a swift and deep decline, and that the following days would have some follow through, but instead Bernanke spoke on the 27th and the markets haven't looked back since. This happened in November 2011 around Thanksgiving. The markets looked ready to break on a Friday, but over the weekend there was an announced central bank coordination and the markets rallied.

The Fed is very attuned to the markets. They see what we see. When they see acute vulnerabilities they respond...every time. I sensed we were close to that breaking point in February but the invisible hand once again acted.

Top Line Sales And Profit Growth Falter As The Dow Approaches All Time Highs [View article]

I echo tampat in his praise of this thorough article, Joseph.

Is this the most aggressive backstopping yet? It seems to me that this market could have and should have fallen apart on several occasions over the past several weeks but still has not. As you've pointed out in your previous articles it is beyond the Fed's capability to corner a market when investors run for the exits. It will be interesting to see how this plays out.

Joseph, while my prediction hasn't come to pass, I did notice strange behavior in the markets the last two days. After hours, for instance, on SPY, QQQ, and IWM there were large orders, presumably sell orders fulfilled at much lower prices, that brought the indexes down substantially, especially on SPY, which had four such orders. Do you make anything of that?

Market recap: The S&P 500 broke below 1,500 and the Dow declined more than 200 points, shortly after hitting a new multi-year high, as the prospect of a hung parliament in Italy renewed scary scenarios of widening sovereign debt yields and another flare-up of the eurozone debt drama. The uncertainty also sank Treasury yields to one-month lows, and pushed gold and industrial commodities sharply higher. [View news story]

Very good, pros and cons! The election is a proxy for a market that is like a weak roof and the accumulating effect of heavy snow (weakening economies globally that monetary stimulus hasn't been able to prevent despite great efforts). When weak roofs support heavy snow something eventually gives. We, I believe, are beginning to see that collapse playing out.

In mid-December, I called (here on S.A. in my comments and later in blog posts) for a fool's gold rally through February, a weak GDP at the end of January, a collapse in equity prices on or around Valentine's day, and a spiking Vix.

My positioning, since the beginning of February, has been to buy Vix calls, IWM puts, and long UVXY, among other trades.

Would you call today confirmation? I think we break before month's end, and most likely Monday. The heavy wet snow (bad economic reports, such as Eurozone deterioration, Walmart's sales numbers, weak housing, higher unemployment, etc.) is sitting on a weak roof (an overextended, low volume market, replete with margin.). Only a matter of time before the roof caves in.

The High Cost Of Backstopping The Wal-Mart Mini Crash [View instapost]

The High Cost Of Backstopping The Wal-Mart Mini Crash [View instapost]

Bravo, Joseph! Great article. Valentine's day came and went apparently without even a murmur but under the surface a storm is brewing, one that you articulate beautifully in this post. While my prediction of Valentine's day crash was not precise, I believe what we are seeing are the signs of a market cracking.

Most people believe a market crashes when it suddenly loses a significant amount of its value, which can be blamed on some trigger event. But I look at it more as a rooftop that is piled high with heavy, wet snow and finally, and even inexplicably, caves in from the weight of the snow. One might postulate that the bird that momentarily landed on the roof was the cause, or the black swan, but it simply can be attributed to the extreme weight of the accumulated snow and the weakness of the roof.

Any trigger event is more of a symptom of the problem rather than the cause. Such is Walmart's weak sales. This is a symptom of an economy that is contracting regardless of the Fed's aggressive, and wantonly irresponsible, intervention.

I realized my error in predicting a Valentine's day crash. I had a premonition that the market would crash. I asked when and received the premonition that simply stated Valentine's day. I took these two pieces of information and combined them into Valentine's day stock market crash. This logical synthesis was where I made my mistake. I think both pieces of information were correct but my conclusion was in error. Valentine's day, in my opinion, was a palpable turning point in the market. That evening and morning we received reports that the Eurozone and Japan were in worsening recessions. The following day we had the Walmart news. These were not insignificant events.

So the question begs, "When will the market respond to this deterioration and crash?" While I think both pieces of information to be correct, and not misleading, they just shouldn't have been synthesized into a conclusion the actually crash would occur on Valentine's day itself. The market didn't immediately selloff following Lehman. But the seed was planted. I believe like my roof analogy, the weight of the wet snow (a deteriorating economy) and the weakness of the roof (in this case a low volume stock market) will lead to collapse shortly.

We are at the critical juncture that you describe in your article. As I stated in my most recent post "Has the Crash Already Occurred?" I believe the elements of the crash are in place, now the event is just a matter of time, which for someone who is short may feel agonizing, for someone in cash may feel frustrating, and for someone long stocks may be completely unacknowledged.

If you remember I also put out the date: February 27th. To avoid looking like a complete fool, I will refrain from making any bold predictions, one that could create another error of synthesis and not one of intuition, I will not say anything more than I would be shocked if by month's end we don't get any type of selloff.

Investors who fled in fear over potential tax increases from the fiscal cliff have barely broken a sweat over spending cuts only two weeks away, as no one wants to sell again on an armageddon story only to watch stocks climb to new highs. But investors expecting a deal may underestimate the potential impact; with some seeking an excuse to sell after the run-up, failure to reach a deal is "by a long stretch" the top candidate to prompt a real pullback. [View news story]

This is an observation with which I strongly agree. The lawsuit against S&P was a preemptive threat from the U.S. government. They [US officials] know how fragile the markets are at the moment and know that such a move by the rating's agencies would crush a market teetering on the edge. With a global recession intensifying, companies like Wal-mart and Whole Foods, who happen to sell to very different demographics, stating extreme weakness in sales, industrial production contracting, and the list goes on, a rating downgrade would only add to the heavy load that the market is carrying up the mountain peak of all time highs.

There will be a slip up by the end of the month. Those longs that are on the fence are have the doubts sewn into their minds that this so called recovery is really a recession. Once these neutral longs start selling, and bears start short-selling in earnest, and bullish longs capitulate as each dip bought is breached, a crash in equity prices will unfold quickly.

Wal-Mart (WMT-3.1%) responds to a leaked internal memo indicating February sales are weak by noting to CNBC that an executive was issuing an opinion rather than any official company data. While true, the alarm bells are still ringing. The Wal-Mart VP of finance and logistics on February: "The worst start to a month I have seen in my ~7 years with the company." Look for the topic to come up during the firm's earnings conference call on February 21. [View news story]

If economic contraction in Japan and Eurozone and U.S. doesn't cause this market to go down why would weak sales at Wal Mart?

I agree with you wholeheartedly—I don't think a catalyst is needed, a "position structure of the players" is enough. One sign of complacency that I've heard from market participants is that they have been saying there are no catalysts for a selloff in the near-term. I don't think a catalyst is necessarily needed. As I wrote in my most recent blog posts and comments, the crash is already in process.

It is like a MLB hitter that makes contact with a baseball and knows from the first that is a home run just as the ball leaves his bat and he is following through with his swing. We both agree that the bat made contact when Ben Bernanke and the Fed announced QE3 in September. At that point a stock market crash was inevitable but the question was when.

I asked my intuition when? and it returned a powerful vision Valentine's day. The ball has been flying through the air and into the stands for the past weeks and its trajectory was established at the first contact. The "fool's gold rally" was part of the setup to establish the conditions that you describe with a 'ton' stop losses underneath this market. This made it possible for this crash that is quickly approaching that will break the trajectory of this cyclical bull market that began in 2009.

Thanks, Joseph, for sharing your insights and predictions as well. I think we will both be shown to be correct in our views regarding the market.